The changes China’s economy has undergone over the last decade are sweeping, unprecedented, and essential. The world would be far better served by an effort to understand them than by attempting to prove that the country’s achievements are less impressive than they are.

Zhang Jun

SHANGHAI – For the West, the year 2008 marked the beginning of a difficult period of crisis, recession, and uneven recovery. For China, 2008 was also an important turning point, but one followed by a decade of rapid progress that few could have foreseen.

Of course, when the US investment bank Lehman Brothers collapsed, triggering a global financial crisis, China’s leaders were deeply worried. Their concerns were compounded by natural disasters – including severe freezing rain and snow storms in the south in January 2008 and the devastating Sichuan earthquake five months later, which killed 70,000 Chinese – as well as unrest in Tibet.At first, China’s fears seemed to be coming true. Despite hosting an impressive Olympics in Beijing that August, its stock market plunged from its 2007 high of 6,124 to 1,664 in October 2008, in what amounted to a record-breaking crash.But the Chinese authorities remained dedicated to their long-term plan to revise the country’s growth model, by shifting away from exports and toward domestic consumption. In fact, the global economic crisis served to strengthen that commitment, as it underscored the risks of China’s dependence on foreign demand.This commitment has paid off. Over the last decade, many millions of Chinese have joined the middle class, which is now 200-300 million strong. With an average net worth of $139,000 per person, this group’s total spending power could amount to over $28 trillion, compared to $16.8 trillion in the United States and $9.7 trillion in Japan.China’s middle class is already wielding that power. China accounts for 70% of global luxury purchases annually over the past decade. Though per capita car ownership is only around half the global average, since 2008, the Chinese have consistently been the world’s leading auto purchasers, surpassing Americans. In 2018, more than 150 million Chinese traveled abroad.

For China’s authorities, fostering the emergence of such a formidable middle class was a crucial strategic opportunity. As Liu He, Chinese President Xi Jinping’s top economic aide, wrote in 2013, the goal for China, prior to the crisis, lay in becoming a global production center; achieving it would attract international capital and knowledge. After 2008, China’s strategic imperatives shifted to reducing debt risk and boosting aggregate demand, while deploying massive economic stimulus to encourage domestic consumption and investment, thereby decreasing China’s vulnerability to external shocks.As part of this initiative, China pursued large-scale infrastructure investments, such as building nearly 30,000 kilometers (18,600 miles) of high-speed railway. Increased connectivity – last year alone, that railway network carried nearly two billion passengers – facilitated much closer regional economic ties, propelled urbanization, and enhanced consumption substantially.Thanks to such efforts – together with mergers and acquisitions to acquire key technologies and lucrative infrastructure investments in developed economies – China’s economy almost tripled in size from 2008 to 2018, with GDP reaching CN¥90 trillion ($13.6 trillion). Whereas China’s GDP was 50% smaller than Japan’s in 2008, by 2016, it was 2.3 times larger.To be sure, difficult challenges emerged. Land and housing values soared, with urban real-estate prices rising so fast that many feared a bubble. Credit growth raised further risks. Overall, however, expansionary policies supported China’s rapid emergence as a global economic power globally.But China’s leaders did not plan one crucial feature of this growth pattern, let alone bring it about with industrial policy: the consumption-focused innovative industries that barely existed in 2008 and that are increasingly propelling the Chinese economy today.China is now the global leader in e-commerce and mobile payments. In 2018, mobile payments in China amounted to $24 trillion – 160 times the US figure. The state-owned banks and petrochemical companies that were China’s top-ranking firms in 2008 have been surpassed by e-commerce and internet giants Alibaba and Tencent. Internet and technology firms are now creating tens of millions of jobs per year.Meanwhile, the performance of the manufacturing sector – long the main engine of China’s development and still the country’s largest employer – has weakened, undermined in part by rapid wage growth. The result has been a fundamental change in the structural composition of China’s economy.Yet rather than exploring this shift – which is not captured in traditional measures of GDP – many economists have focused on trying to poke holes in China’s growth narrative. A recent Brookings Institution study, for example, estimates that China’s economy is about 12% smaller than official figures indicate.This does little good. The changes China’s economy has undergone over the last decade are sweeping, unprecedented, and essential. The world would be far better served by an effort to understand them than by attempting to prove that the country’s achievements are less impressive than they are.

Zhang Jun is Dean of the School of Economics at Fudan University and Director of the China Center for Economic Studies, a Shanghai-based think-tank.

“I STARTED THE business because I love milk tea myself,” says Peng Yuxia. Meet the Cow, her shop in Hangzhou, 200km south-west of Shanghai, sells the cassava-based hot drink, also known as bubble tea, to passers-by—and, increasingly, to customers who pre-order on their phones. Recently she signed up to a small-business programme run by Ant Financial, China’s biggest fintech firm, which has its headquarters nearby. Now customers can order in advance from within Alipay, Ant’s payment app, and she has seen total numbers rise from about 50 a day to nearer 70. Payment is by scanning a QR (quick-response) code—so easy, she says, that a mother getting a pedicure next door can send a child in to order with her phone.In another part of Hangzhou, Zeng Ping’en looks around his electric-moped shop with pride. A loan from MYbank, Ant’s digital bank, helped with the cost of redecoration. Applying took just a few minutes, he says: “A click on the phone and I got my money.” He can draw down and repay funds at his convenience; interest amounts to a few yuan a day—“easily affordable”. Since China’s long-established banks lend mostly to companies, without the MYbank loan he would have had to wheedle loans from his friends. “Electric-moped shops are getting fancier,” he says. “I’d lose out to the competition if I didn’t renovate.”

Ant’s origins lie in Alipay, set up in 2004 by Alibaba, then a newish e-commerce website, to make online payments easier. As Alibaba grew, its payment arm started to allow person-to-person transfers, and then purchases in bricks-and-mortar outlets. Alipay was spun off in 2011. Renamed Ant Financial in 2014, it is now one of the world’s biggest financial firms. Its most recent funding round, last year, valued it at $150bn. Alibaba announced last year that it would acquire a 33% stake. Together with its main rival, WeChat Pay, which sits within WeChat, the country’s dominant messaging app, Alipay has transformed Chinese commerce—and everyday life. They have enabled China to leapfrog straight to mobile payments using QR codes, bypassing credit and debit cards. All manner of things can be done from within their apps, including buying tickets for flights, train journeys and films, calling a taxi, paying an electricity bill, ordering food and much more.In the past five years Ant has expanded beyond payments and into other financial services. In 2013 it set up Yu’e Bao (“spare treasure”), a single-click, instant-access way to earn interest on excess Alipay balances by parking them in a money-market fund. By March 2018 the fund had 1.7trn yuan ($250bn) in assets, making it the world’s biggest money-market offering by a wide margin.In 2015 Ant started providing revolving consumer credit. The following year it launched MYbank, using Alipay data to set interest rates and credit limits for small-business loans. Ant Fortune, launched the same year, gives access to Yu’e Bao, now with a choice of money-market funds, and a range of wealth-management products from nearly 30 asset-management firms.Startled by Ant’s hectic growth, in the past couple of years Chinese regulators have sought to slow its pace, setting daily limits on transfers within Alipay and caps on those into and out of Yu’e Bao. Regulators abroad, too, have crimped Ant’s ambitions. Last year America’s investment-screening committee blocked Ant’s purchase of MoneyGram, a money-transfer firm, which would have given it access to 350,000 retail outlets globally—and a foothold in America, the biggest market for financial services.The setbacks forced a rethink. At home, Ant’s top brass now talk about supporting incumbents to find new customers and become technically more nimble. Its foreign plans have been slimmed down, too. It is focusing on enabling Chinese people to use Alipay abroad (now possible in 54 countries and hundreds of thousands of shops) and expanding into developing countries. Ant now has stakes in, or partnerships with, digital-payment firms in countries including Bangladesh, India, Malaysia, Mexico, the Philippines and Thailand. “We see our role as serving the unbanked and underbanked,” says Leiming Chen, its general counsel.

Bestriding the world

Ant’s giddy growth is both a cause and a consequence of big changes in Chinese life: development, urbanisation and the emergence of a vast middle class ready to spend. But it also exemplifies a broader shift in the provision of financial services. That shift goes well beyond China’s borders. In hindsight, the pivotal year was 2007, when the credit crunch started and the iPhone was launched. The consequences of the crunch have preoccupied bankers everywhere for more than a decade. The smartphone, it is becoming clear, will matter at least as much for their future.Start with the threat from Ant itself. Many bankers in developed countries fear that its plans for aggressive expansion beyond China have merely been postponed. That worries rich-world incumbents, since a hungry new arrival would mean slimmer pickings for those already at the table. And Ant’s “platform” approach—offering a pick-and-mix of financial and non-financial products from other companies on its app—poses a challenge to the current (or checking) account that is the central relationship with banks of most people in rich countries. If that core were to break up, how would banks cross-sell loans, mortgages or insurance, profit from interest-rate spreads and commissions, or charge fat fees for occasional services such as foreign exchange or overdrafts?“I understand why [banks] would be a little scared: the sheer size of our user base and the variety of services we offer,” says Mr Chen. But incumbents everywhere have nothing to fear, he insists: Ant sees its role not as displacing them, but as helping them serve customers they would otherwise not be able to reach. Its expertise is in creating value from technology, not from deploying capital to support loans, he says. “The notion of us being a disrupter, or some creature that traditional financial institutions should be scared of, is misguided.”Many of those institutions are quaking nonetheless. And being disrupted by Ant is just one of their digitally induced nightmares. In another version a Western tech giant—Amazon is mentioned most often—decides to move into banking. Or a messaging or ride-hailing firm expands into financial services—like Kakao in South Korea, which owns the country’s favourite chat app and now offers payments and banking; or Grab and Gojek in South-East Asia, ride-hailing services that have moved into payments, insurance and loans. Some incumbents fret that customers might decamp en masse to a mobile-only “neobank” that offers its own current account but also acts as a broker for products offered by other financial institutions, such as Monzo in Britain or N26, now in 24 countries in Europe and planning to go farther afield.In such scenarios incumbents risk ending up as “dumb pipes”, holding bloated balance-sheets and originating products such as mortgages and loans that someone else sells to consumers. If they were to lose the ability to build a brand and the transaction data needed to understand their customers and cross-sell, their wares would become interchangeable. Margins would be driven down, even as they continued having to abide by onerous banking regulations and hold balance-sheet risk.The mobile phone allows financial products to be linked with other services in novel ways. Take Ant Financial’s main rival, Tencent, the social-media and gaming giant that owns WeChat. It moved into payments in 2013. Uptake was slow until the company spied an opportunity in the tradition of giving cash gifts in red envelopes to friends and relatives during Chinese new year. In 2014 it added a digital “red envelope” feature to WeChat; 40m were sent over the holiday period. In 2015 an astonishing 500m were sent on the single busiest day.

Though Alipay hurriedly added its own red-envelope feature, the damage had been done: WeChat Pay had become a fixture on Chinese people’s phones. It continues to benefit from being embedded in an app that is used by most Chinese people many times daily, and which connects them to everyone they know. Its share of mobile transactions has risen steadily and now accounts for 39% by value (though somewhat more by number, since it tends to be used for smaller transactions), against 54% for Alipay (see chart). Tencent also offers personal loans and runs an online bank, WeBank. A move deeper into financial services would further threaten Ant’s position.

Innovation generation

This special report will argue that banking incumbents will need to reinvent themselves to survive the restructuring of their industry. It will also offer a way to understand the coming fight: as a co-evolution of incumbents, fintechs, neobanks and consumers, with developments in each country shaped by, among other things, the strength of existing banks, quirks of the local market and the attitude of regulators.It will focus on Asia, where the population is young, the market for low-cost financial products is growing fast and incumbents are weak; and on places where financial regulators are seeking to boost competition by encouraging new banks, notably Britain. It will have little to say about America, where digital banking has not yet had much effect on the industry. Incumbents are sheltered by a thicket of state and federal regulations, and running a free-standing digital-only bank is nigh-impossible.Since the evolutionary pressure comes from the mobile phone, the best way to view the fight is through the eyes of its most devoted users: the under-30s. Though people of every age are turning to mobile banking, the future of the industry is clearest to see in the hands of digital natives. A good place to start is South Korea, which is the world’s most connected country—and perhaps also its most overbanked.

When a bank is making a lot of money while seemingly taking little risk in a small branch far from head office, there are two possibilities. The first is that it has invented a legitimate service that competitors will soon start to copy. The second is that it is about to get into terrible trouble.The second has transpired for Danske Bank and Swedbank in Estonia — the magic formula turned out to be alleged money laundering for Russian criminals and oligarchs, who were using the banks to move suspicious cash abroad. Swedbank last week dismissed its chief executive Birgitte Bonnesen, following the ousting of Thomas Borgen, Danske chief executive, in September.The Russian laundromat scandal that has enveloped Nordic banks, and is drawing in others in Austria and elsewhere, raised big red flags. As with cases of rogue trading such at Barings in Singapore in the 1990s, and mysteriously profitable “innovations” such as at AIG’s London credit derivatives unit before the 2008 crash, big profits were pouring out of a tiny business.Much of banking is highly competitive and no one is incentivised to look a gift horse in the mouth; Ms Bonnesen and Mr Borgen had both previously run their banks’ Baltics businesses. But when a unit makes a 400 per cent return on capital (as did Danske’s Estonian operation for non-residents in 2013) in an industry that struggles to reach double figures, caution is required.There must be a reason why a small group of customers is willing to pay any bank so much. Some 15,000 Danske customers, mostly non-residents from Russia and former Soviet states, ran €200bn through its Estonian bank, contributing 99 per cent of the branch’s 2013 profits before bad debts. Obtaining entry to the EU banking system via Estonia was priceless.As usual with such disasters, Danske believed that it was not only making lucrative profits but running minimal risk. “The branch took no credit risks of any significance,” records Danske’s internal report into its failure by a Danish law firm. This made its return on capital huge compared with traditional banking — lending to borrowers who may not repay their debts.Banking’s story for three decades, reaching back to the Scandinavian banking crisis of the early 1990s, has been a quest to find alternative sources of revenue to credit. The problem with lending is that it seems profitable for a long time, but the real return is lowered by periodic crises and asset write-offs, often related to property loans.That led many banks into investment banking and trading in the 2000s, when many credit derivatives turned out to be a means of packaging lending risk rather than abolishing it. It also led into private banking, which is a luxury business if your customers are not tax avoiders or criminals, and to the mundane but reliable activity of transaction banking and trade finance.The Estonian branches of Danske and Swedbank were engaged in the latter, which was regarded as a comfort. Cash flowed in and out, often linked to trade and foreign exchange transactions, and they took a small cut along the way. A Boston Consulting Group report refers to “the low-risk nature of trade finance” in relation to credit, and it appeared like that to the banks’ head offices.In practice, a significant slice of this “trade finance” was illusory. Money was allegedly passing out of Russia to offshore shell companies, with fictitious trade transactions being concocted as the cover. Danske organised up to €8.5bn of “mirror trades” for Russian clients within a year, enabling them to swap currencies by buying bonds in roubles and swiftly sell identical securities in foreign currencies.The banks should have known. Danske foolishly trusted in its anti-money laundering controls, although it had little insight into what was going on locally — the Estonian branch used a different computer system and most documents were in Estonian or Russian. Swedbank’s culpability is less clear, although it handled €135bn in high-risk non-resident flows in Estonia.It was obvious that they were profiting from trouble. There was swift capital flight out of Russia during this time, and $800bn of Russian wealth is estimated to be held offshore. Much of that is legitimate, but there have been enormous flows of criminal money, often funnelled through former Soviet states such as Moldova, using sophisticated corporate frauds.Trade finance in the Baltics thus joins the list of bright ideas that promise banks high profits and little danger, but are traps. “The risk is more than reputational — the fines are going to dwarf any financial benefit,” says Bill Browder, a financier who has campaigned against Russian corruption since the 2009 death of accountant Sergei Magnitsky in a Moscow jail.Financial risk comes in many forms, not merely credit, and whereas banks used to be able to absorb fines for lax controls as a cost of doing business, the cost is now too high. As with loans, it appeared that these transactions were highly profitable — but once adjusted for risk, they were terrible. Those Russian criminals were getting an extremely good deal on their fake business.

The report by US special counsel Robert Mueller shows that a criminal approach to links between President Donald Trump's 2016 election campaign and Russian interference on his behalf never made much sense. An independent commission would have conducted a more realistic and comprehensive investigation.

Elizabeth Drew

WASHINGTON, DC – The political situation in the United States is more unsettled now than at any time since I began covering it, including the Watergate era. President Donald Trump is a desperate, wounded, and unstable figure – a bloated, increasingly red-faced presence railing against the indignities to which he feels subjected by “haters” with nefarious motives.

Despite Trump’s seemingly unhinged rants, he appears to have understood from the start that his presidency was highly vulnerable. The report by US special counsel Robert Mueller, released last Thursday by Attorney General William Barr, cites Trump’s reaction to the news on May 17, 2017, that Mueller had been appointed to investigate his and his campaign’s links with Russia. “This is the end of my presidency,” Trump said. “I’m fucked.” Mueller’s appointment came nine days after Trump, urged on by his son-in-law, Jared Kushner, recklessly fired FBI director James Comey. Kushner argued, dimly, that because Comey had harmed Hillary Clinton’s 2016 presidential campaign, his dismissal would be popular among Democrats.Mueller, a widely respected former FBI director, was to pick up Comey’s investigation into Russian interference in the 2016 election and the Trump campaign’s relationship with those efforts. By the time Comey announced the investigation in March 2017 (and introduced the word “collusion” into the Russia discussion), the FBI had opened another investigation, not covered in Mueller’s report, into whether Trump or others around him had been compromised by Russia. That investigation reportedly continues.Trump’s reaction to the appointment of Mueller was perhaps the most honest thing he’s known to have said about his situation. From then on, he fought and maneuvered to prevent Mueller’s team from finding out how involved his campaign had been with high-level Russians.Mueller’s redacted report – about 10% was blacked out, much of it presumably because it could affect ongoing prosecutions – hit Washington like a nuclear bomb. Its cautious approach was the source of its power. Although the report declined, mainly on narrow or technical grounds, to recommend that Trump be indicted – either in connection with the Russians’ 2016 efforts or for obstructing justice in his numerous attempts to block the counsel’s work – its dry, methodical, relentless recitation of why Trump was vulnerable on both fronts was devastating. And through his restraint, Mueller prevented his report, rather than Trump’s behavior, from being the issue.

Barr’s pathetic efforts to spin the report favorably to Trump – as he did via an unwarranted press conference 90 minutes before the report was released to Congress or the public – was all the more embarrassing when it became clear that he had lied about several points. He must have known that his lies about the report’s contents would be exposed immediately. Whether he thought he was helping Trump by drawing some fire himself, or was following orders, he disgraced himself. Barr, the kind of attorney general Trump had been wanting, is now subject to congressional chastisement in some form. In fact, Mueller clearly indicated that he thought Congress should act where he was prevented from doing so by a peculiar Justice Department rule, and that Trump should be prosecuted after he leaves office. Mueller’s team rejected the term “collusion” as having no legal meaning, and settled on “coordination,” which it then defined narrowly as “an agreement – tacit or express – between the Trump Campaign and the Russian government on election interference.” Thus, the report does not conclude that there was no interaction between the Trump campaign and Kremlin-connected Russians – or, as Trump had been claiming repeatedly, “no collusion.” It says only that it could find no evidence to “establish that the Trump Campaign coordinated with the Russian government in its election interference activities.” (Note the words “establish” and “government.”) It also rejected “conspiracy” on these narrow grounds.And yet the report highlights the heavy traffic between members of the Trump team and Russian intelligence agents and oligarchs close to the Kremlin. It also disclosed that Trump’s campaign chairman, Paul Manafort, had given his close associate Konstantin Kilimnik, a Russian/Ukrainian intelligence figure, detailed internal polling information and briefed him on the “battleground states” crucial to Trump’s victory. Trump’s razor-thin margins in three states crucial to his victory – Pennsylvania, Michigan, and Wisconsin – which he carried by only 80,000 votes combined, suggests that Russia might indeed have played a defining role in the election. But, though the narrow definition of what was beyond bounds may seem to defy common sense, Mueller was constrained by what he thought he could prove in court.At the same time, the report indicates that Mueller believes Trump is guilty of attempting to obstruct the investigation. But he couldn’t recommend filing those charges, he wrote, because of a Justice Department rule against indicting or prosecuting a sitting president. The rationale for the rule – first established in 1973, when Richard Nixon was in legal jeopardy, by a Justice Department that was beholden to him – is that court proceedings would take too much of the president’s time. However questionable that justification, the rule – reaffirmed in 2000, in the wake of Bill Clinton’s impeachment scare – has taken on the aspect of holy writ.But, exemplifying the maxim that where one stands depends on where one sits, two special or independent counsels came to opposite conclusions. But even if Mueller, a by-the-book man, had been inclined to challenge the rule in the courts, doing so could have taken a great deal of time. And Mueller indicated that fairness required him not to indict Trump without following that up with a trial, because the president would be marked without having a chance to clear himself. The report did, however, suggest that charging Trump after he leaves office would be proper, and Mueller’s team has spun off 14 other cases to federal prosecutors concerning the president’s business activities and fundraising for his inauguration in 2017. Between those pending cases and others alleging abuse of presidential power for private gain, Trump’s post-presidency looks bleak – which implies that he will fight all the harder for reelection, hoping to beat the statute of limitations on a number of these charges.A criminal approach to the Russia scandal never made much sense. An independent commission, like the one Congress established to investigate the September 11, 2001, terrorist attacks, would have been able to examine more realistically and comprehensively the possibility that an illegitimate president and profligate crook is in charge of the US government, as well as the ongoing threat of corruption by an ill-intentioned foreign power. Now the ball is back in the court of Congress, which is deeply divided over what, if anything, to do about it.

Elizabeth Drew is a Washington-based journalist and the author, most recently, of Washington Journal: Reporting Watergate and Richard Nixon's Downfall.

The U.K. has a week to avert a no-deal departure from the EU. What will happen if it fails?

By Jacob Shapiro

The United Kingdom has until April 12 to avert a no-deal Brexit. If the British Parliament is unable to pass a negotiated divorce by then, the U.K. will leave the European Union without a deal in place to govern their economic relationship. A no-deal departure is bad for both sides, though, and so remains one of the least likely scenarios for how this extended drama will play out. It is more likely that the U.K. will request (and be granted) an extension or that the House of Commons will reach a consensus at the 11th hour.

Even so, the hour is late, and Britain has elected to squabble internally over what its national interest is rather than ruthlessly pursuing that national interest. The possibility of a no-deal Brexit is now real enough to consider what such a departure would mean.

Impossible Negotiations

Britain’s internal politics have complicated a process that, on paper, should have been relatively simple. Two and a half years after the U.K. voted to leave the EU, there’s no consensus on what “leave” actually means. Unlike the EU, which has been able to articulate its demands without recourse to popular approval, the British government has had to articulate and pursue what it believed was in the best interests of the British people while building consensus for that position in Parliament. The British government succeeded at the former and failed miserably at the latter. The deal Prime Minister Theresa May’s government negotiated was rejected by the Parliament, as was virtually every other permutation of the agreement.

As a result, instead of a single British viewpoint expressed by a duly empowered and legitimate British representative, the U.K.’s most important decision in a generation is now being endlessly debated by lawmakers interested primarily in demonstrating how important they are to their constituents. That's not a knock against the lawmakers – that's how representative democracies work. Representative democracies also elect political executives to make the difficult decisions something as fraught as Brexit requires. Every decision here for the U.K. is a tough one, and it is unreasonable to ask a lawmaker to risk pain for his or her constituency even if the country would be better off in the end.

This dynamic has helped tilt the deal May’s government negotiated in the EU’s favor. True, the EU is a much larger economy than the U.K., but May’s government has been negotiating with both hands tied behind its back since the very beginning. May’s greatest political strength – her pragmatism – became her worst enemy as she managed to produce a deal that everyone hated and that she did not have the authority to sign. Hard bargaining for key compromises in the best interests of the British people turned out to be only step one of the process; British negotiators also had to consider what kind of agreement would be palatable to Parliament. That was a recipe for disaster. May’s instinct to accommodate and build consensus doomed her from the beginning; a tough negotiation turned out to be the arena least suited to her political virtues.

Economic Disarray

The United Kingdom and the European Union now stand at the edge of a precipice of a no-deal Brexit, the ramifications of which would be many. Some are even predictable. In both the short and medium term, the British economy will be worse off than if it had stayed in the EU. It's true that many of the pre-Brexit prognostications suffered from overactive imaginations, but an April 16 report by the Organization for Economic Cooperation and Development did a decent job at predicting the practical import of the U.K.’s vote to leave. It said that the U.K.’s gross domestic product would be 3 percent smaller by 2020 than if it stayed in the EU; that comports with both the Bank of England and Centre for European Reform’s estimates that the U.K.’s GDP is roughly 2.5 percent smaller today than it would have been had Britain voted “remain.” (PwC and the National Institute of Economic and Social Research also had reports that were close to the mark.)

The OECD report predicts that by 2030, the impact will be even greater. It estimates that the U.K.’s real GDP will be somewhere between 3 and 8 percent smaller than if it remained in the EU. It also predicts a decline in foreign direct investment, an increase in the current account deficit, and a decline of nearly 6 percent in exports to the EU – even with a free trade agreement in place. Of course, predicting these kinds of macroeconomic developments given the current uncertainty is something of a fool’s errand – that’s why so many of the predictions after the Brexit referendum were wrong. But even some Brexiteers admit that a no-deal Brexit would in the short term hurt the British economy, which has in recent decades become a services-focused economy that leverages its proximity to the EU and London’s position as one of the world’s most important financial capitals. It is possible to negotiate new trade deals and to reshape the British economy. But even in the best-case scenario, that kind of fundamental reorientation will take years and will negatively affect the livelihoods of millions of British workers.

The British government has various plans to attempt to mitigate the damage. On trade, for instance, in the event of a no-deal Brexit, the British government might remove tariffs on 92 percent of imports from the rest of the world and on 82 percent of imports from the EU, aiming to increase trade with non-European countries while protecting British companies in key sectors from European competition. But, like all things in the U.K. right now, these measures are highly controversial. Of course, if a no-deal Brexit happens, trade between the U.K. and the EU will not simply stop. A no-deal Brexit means the two will trade under World Trade Organization rules and tariff levels. For the U.K., that will mean specific sectors – like car manufacturing and agricultural production – will lose unfettered access to European markets. For British consumers, it will mean higher prices on some goods and services. The WTO’s director general perhaps said it best last August when he said a no-deal Brexit is “not going to be the end of the world … but it’s not going to be a walk in the park either.”

British Disunion

The bigger and more problematic issues, however, are political. Remember, the United Kingdom comprises four countries: England, Scotland, Wales and Northern Ireland. Only in England and Wales did a majority vote for Brexit. In Scotland and Northern Ireland, large majorities voted “remain.” For the English and the Welsh, even a no-deal Brexit could arguably reflect the will of the people. The short- and medium-term economic uncertainty and dislocation was the price London paid for reclaiming its sovereignty from the EU. Not so in Scotland and in Northern Ireland. The majorities in these countries did not choose to suffer economic hardship in return for British sovereignty – they would have preferred to keep relations with the European Union as they were. For them, a no-deal Brexit would be just the latest in a long list of English impositions.

No-deal is particularly significant for Scotland. When Scotland agreed to join the newly constituted United Kingdom in 1707, the economic benefits of doing so outweighed the cost of its sovereignty (a decision that, at the time, was highly controversial and widely protested). In the centuries that followed, union with England was a good deal for Scotland; by virtue of this relationship, Scotland greatly benefited from its participation in the Industrial Revolution. A well-planned Brexit that appropriately looked out for Scotland’s interests is one thing, but a no-deal Brexit is by definition the opposite. A no-deal Brexit would mean that for the first time in more than three centuries, it might be better for Scotland to be out of the Kingdom than in it (assuming, of course, the EU would be willing to fast-track Scottish membership, a step Brussels has thus far been coy about at best). In a 2014 referendum, Scots narrowly voted against independence (55.3-44.7), and most recent polls still suggest a majority would vote to remain in the U.K. if a new independence referendum was held today. But it is not at all clear whether that would still be the case after a no-deal Brexit.

Northern Ireland’s situation is different. King James VI and I, who ruled Scotland and England before the union in 1707, sent settlers to colonize parts of Ireland in the 16th century to neutralize an Irish threat to both his crowns. After centuries of oppressive English and subsequently British rule on the Emerald Isle, Northern Ireland elected not to join a newly declared Irish Free State in 1922. The majority of its population was composed of Protestant descendants of the original colonizers, and they preferred to remain part of the United Kingdom. That majority is fast receding. In the 2011 census, Protestants made up 48 percent of Northern Ireland’s population and the Catholics 45 percent. At least one academic expert recently told the BBC that by 2021, Catholics would likely be a majority in Northern Ireland. This demographic transition is inevitable, as is its eventual union with the Republic of Ireland. It is an issue of when, not if.

There would be very real logistical problems at the border between Ireland and Northern Ireland to solve in the event of a no-deal Brexit. But as complex and fraught as those problems are, there is an even deeper and more complicated issue to consider. The Good Friday Agreement, the 1998 peace settlement between the Irish and British governments, requires a poll be held if “it appears that a majority of those voting would express a wish that Northern Ireland should cease to be part of the U.K. and form part of a united Ireland.” It’s not clear whether such a majority would exist in the event of a no-deal Brexit, but the fact that the question has to be asked speaks volumes. The current situation being what it is, the chance for a peaceful transition would be greatly helped by patience on all sides. A no-deal Brexit could force the issue in Northern Ireland, especially if Northern Ireland’s economy, which is relatively weak compared to the rest of the U.K., experiences intense difficulties because of a no-deal withdrawal.

A no-deal Brexit would be bad for the short and medium-term economics of the United Kingdom. It would open a Pandora’s box of questions for the U.K. and potentially challenge the very union itself. It would be detrimental for the European Union, which also stands to see GDP growth and a host of other economic indicators fall in the event of a no-deal Brexit. At the beginning of the year GPF predicted that the U.K. would leave the EU with a deal in place, and that is still, it seems to us, the most likely scenario. But we have been given sufficient pause in our confidence to ask, “what if?” No doubt British and European officials are asking themselves the same and are working tirelessly to prevent a no-deal scenario. It remains to be seen if that will be enough.

Lending for real-estate purchases in China is still on the up: Recently published accounts show mortgage credit making up an ever-larger share of total loan books at three of the country’s four largest banks.Having their fortunes so tightly tied to the health of the property market is a challenge not just for the banks but for China’s entire development model, given that household debt has hit levels that other Asian success stories didn’t reach until far later in their development.At Bank of China BACHY 0.77%▲ and Agricultural Bank of China , ACGBY -0.72%▲ total real-estate lending last year hit 38% and 39.5% of loans outstanding, respectively—both nearly double the level before the global financial crisis a decade ago. At both banks, residential mortgage lending alone accounted for more than half of domestic lending over the past four years.

Industrial & Commercial Bank of China IDCBY 0.67%▲ didn’t update its 2017 figure of 36%. China Construction Bank , CICHY 0.38%▲ the other of the big four, does little mortgage lending.Chinese household debt exceeds 50% of gross domestic product, according to statistics from the Bank for International Settlements, twice the ratio in 2010. By comparison, household debt in South Korea was last at 50% of GDP when GDP per capita was around twice China’s current level, at the turn of the millennium, according to World Bank figures. For Japan, the milestone wasn’t reached until GDP per capita was more like four times China’s, in 1983.

Economist Joe Studwell has argued that Asian countries whose banks and governments stuck to disciplined investment in export industries have prospered—while those that allowed lending for speculative property investment have not.

If you build it, they will lend. Photo: Qilai Shen/Bloomberg News

And last year, an International Monetary Fund working paper showed a significant negative link between household debt growth and income growth over the following one to five years, for both emerging and advanced economies.Higher household debt need not doom China to stagnation. For the past 40 years, the country’s performance has repeatedly defied naysayers. But having strayed so far from the route followed by Asia’s other success stories, Beijing will need to find its own alternative—and untested—path for continued growth.

If you know the other and know yourself, you need not fear the result of a hundred battles.

Sun Tzu

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.